5 Ways Charitable Giving Can Star in Your Financial Strategy

Helping others is great, and helping yourself is always good as well, so why not do both at the same time? Integrate these five strategies into your financial plan, and you can.

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When professional baseball player Austin Barnes extended his contract (opens in new tab) with the Los Angeles Dodgers for another two years, he specifically included in the agreement a commitment on his part to make charitable donations.

That was a generous move and a financially savvy one all at the same time. He can put his money to work helping causes he believes in, while also enjoying tax advantages.

Most of us don’t have multimillion-dollar professional sports contracts like Barnes, but there are ways to increase your own donations and, at the same time, reduce your tax bill.

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After all, you probably have a cherished cause — a church, an animal rescue organization, a homeless shelter or some other nonprofit — that you want to help. With charitable donations, you can choose specifically how your money is put to use, which isn’t the case with your tax dollars, which just go into the big tax pot in Washington.

Think of it this way: If you were told that you aren’t going to be able to keep $10,000 anyway, wouldn’t you prefer to have a say in exactly how it is spent?

With that in mind, here are five ways to make charitable giving a key part of your financial plan:

1. Set up a donor-advised fund (DAF)

This is a strategy that isn’t put into play often enough, in part because many people don’t know about it. A donor-advised fund allows you to make a sizable charitable donation that you can claim immediately as a tax deduction. The money isn’t donated immediately, though. Instead, it is placed in an account, and then you can distribute it out in small chunks over several years to nonprofit organizations of your choosing. An organization sponsors and manages the account, but you decide how and when the money is donated.

How might you benefit from a donor-advised fund? For example, let’s say you own a stock with a massive cost basis issue. You could donate that to the donor-advised fund, allowing you to avoid paying the capital gains tax as well as make your donations.

2. Donate your required minimum distributions (RMD)

If you have retirement savings in a tax-deferred account, such as a traditional IRA or 401(k), required minimum distributions (RMDs) kick in when you reach age 72. Essentially, the government requires you to withdraw a certain percentage each year, so it can collect the income taxes on that withdrawal.

This represents another opportunity to maximize charitable giving. Suppose you don’t need that IRA money, and you planned to make donations anyway. You can arrange for your RMD to go directly to a charitable organization through a qualified charitable distribution (QCD). You can donate up to $100,000 tax-free in this way. Not only is this a tax savings, but by avoiding the RMD, you keep your income lower for Medicare purposes, helping you avoid a potential increase in your premiums.

3. Bequeath money to a charity in your will

People often leave money to a charity after they die, but even that can be done strategically. If you just leave the charity a dollar amount, that money will come from a checking or savings account. Instead, it might be better to leave your IRA to the charity.

Why is that? Let’s say you also have children you are naming in the will. If they inherit money from a checking or savings account, they pay no taxes on it. If they inherit an IRA, they will end up owing taxes. But the charity owes no taxes either way. So, leave the charity the IRA and allocate the other cash among your heirs.

4. Set up a trust

Another way to make charitable donations is to create a charitable trust, which has several benefits. Here are a couple: A charitable trust provides a deduction on your income taxes. Also, you can donate an asset to the trust that has appreciated in value and is subject to capital gains tax. However, once the asset belongs to the charitable trust, no capital gains tax is owed.

5. Inspire the next generation — or two

If you have a philanthropic disposition, you can pass that along to your children and your grandchildren. One way to do this is to give them a certain amount of money with the intent that they are to donate it to a charity. They, of course, get to pick the charity. This is an excellent way to help them understand the concept of giving back and the satisfaction that comes along with doing that.

These are just a few ways to approach charitable giving that allow you to do good and to save on taxes, all in one. Making sure you do things the right way can get complicated. A financial professional can explain in more detail how these and other giving strategies work and help you decide what giving strategy would be best for you.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Matt Landon, Investment Adviser
Financial Adviser, Semmax Financial Group

Matt Landon joined Semmax Financial Group (opens in new tab) as an adviser in 2017. He is a licensed insurance agent and has passed the Series 65 securities exam. He is a graduate of University of North Carolina Greensboro with a Bachelor’s of Science in Kinesiology. Matt is currently enrolled in North Carolina State’s Online CFP® Certification Education Program and is studying for the CERTIFIED FINANCIAL PLANNER™ designation.